RBC Bearings Incorporated
Q1 2015 Earnings Call Transcript

Published: 11 May 2015

[Operator:]

Good morning and welcome to the Regal Beloit First Quarter 2015 Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Mark Gliebe. Please go ahead.

[John M. Perino:]

Thank you, Andrew. This is John Perino. Good morning and welcome to the Regal Beloit first quarter 2015 earnings conference call. Joining me today are Mark Gliebe, Chairman and CEO; Jon Schlemmer, COO; and Chuck Hinrichs, Vice President and CFO. Before turning the call over to Mark, I'd like to remind you that the statements made in this call that are not historical in nature are forward-looking statements. Forward-looking statements are not guarantees, since there are inherent difficulties in predicting future results and actual results could differ materially from those expressed or implied in forward-looking statements. For a list of those factors that could cause actual results to differ materially from projected results, please refer to today's earnings release and our filings with the SEC. We also mention that we are presenting certain non-GAAP financial measures in this presentation. We believe these are usual financial measures for providing you with additional insight into our operating performance and for helping investors understand and compare our operating results across accounting periods and in the same manner as management. Please read this slide for information regarding these non-GAAP financial measures and please see the appendix, where you can find reconciliations of these measures to the most comparable measures in accordance with GAAP. Now, I'll turn the call over to Mark.

[Mark Joseph Gliebe:]

Thank you, John. Welcome and thank you for joining our first quarter call and thank you for your interest in Regal. Before I begin today, just a quick comment. You may have noticed during our introductions that John Perino's title has changed. John has been recently promoted to the role of Vice President of Financial Planning and Analysis, reporting to our CFO, Chuck Hinrichs. John will continue to support the investor relation needs of the company as we conduct our search. And now onto the agenda. For today, I'll give some opening comments; Chuck will provide a financial update; John will give color on markets, operations and the performance of our legacy segments; and then I'll do the same on our PTS segment. After that, I'll summarize and we'll move to Q&A. Regal had a strong start to 2015, both in terms of our first quarter performance and as a result of the acquisition of the Power Transmission Solutions business. Our first quarter adjusted EPS of $1.21 was a 16% increase over prior year and included only two months of PTS ownership. Revenues for the quarter were up 14% year-over-year. Acquisitions represented 16% of the growth and organic growth was 1%. Currency was a $27 million headwind in the quarter or 3% of sales. In spite of a few headwinds, including declining oil and gas markets, weaker orders in China and the 13 SEER pre-build, Regal still managed to grow organically. In the Climate segment, organic growth was essentially flat in the quarter. Stronger sales into India and the Middle East offset the impact of 13 SEER pre-build and weaker sales in the furnace applications as compared to a very strong 2014. In the Commercial & Industrial segment, organic growth was 1%. There was a sizable currency drag of 5%, offsetting acquisition growth of 5%. Strength in North America motors offset weakness in upstream oil and gas and demand out of China. In the Power Transmission Solutions segment, organic growth was 10%, with strength in most businesses. Our recently acquired Power Transmission Solutions business performed in line with our expectation for the two months under Regal ownership. Sales were $107 million and were negatively affected by both currency and the weakness in oil and gas. Speaking of PTS, the integration of the business into Regal is on track. We use a simple red, yellow, green status to measure our progress. And all the 26 sites around the world that we have to integrate into Regal, of all of them, 24 of them now have a green status. We expect the site integration to be substantially complete by the end of the third quarter. And synergies, we are also on track to meet or exceed our year one synergy targets, with benefits coming from operational integration, procurement, logistics, cross-selling and tax. Customer feedback on the acquisition has been very positive, and we're in discussions with our customers to find ways to take advantage of the combination. As you can see from the picture, which was taken at the recent Iron and Steel Tradeshow in Cleveland, we are already marketing the PTS brands as part of One Regal. In spite of the currency drag, our adjusted op profit margins increased 40 basis points for the quarter, driven by our self-help efforts, as well as a result of the PTS acquisition. We expect continued improvements throughout the year. On capital allocation, our current bias is to pay down debt. While we cannot predict the timing of attractive deals, our primary focus is on debt reduction. Also, we recently increased our quarterly dividend to $0.23 per share, making 2015 the 11th year out of the last 12 years that we have raised our dividend and the 60th year the company has paid a dividend. As we began the first quarter, we used the term robust to describe North American demand. As we move through the quarter, orders softened and remained soft in April. We are unsure if this is a trend or simply a soft patch in industrial demand. The headwinds we discussed at the beginning of the year are having an impact. Oil and gas sales, which represent 7% of the company's total sales, about two-thirds of which is upstream, are down, affecting both the C&I Systems and Power Transmission Solutions segments. As expected, the strong pre-build demand in residential HVAC that we experienced in the third quarter and fourth quarter of last year created an air pocket in both the first quarter and second quarter of 2015 and will represent tough comparisons in the back half of 2015. On FX, currency was a headwind in the first quarter and we expect currency to be a continued drag on the year. Even with these headwinds, our 2015 guidance represents a 26% to 33% year-over-year adjusted EPS increase, reflecting progress on our two key objectives for the year, margin improvements in our legacy business and a successful integration of the recently acquired $600 million PTS business. I will now turn it over to Chuck Hinrichs.

[Charles A. Hinrichs:]

Thank you, Mark, and good morning, everyone. Sales in the first quarter 2015 were $912 million, an increase of 14% from the prior year. The organic sales growth was a favorable 1%. We had net acquisition growth of 16%. Foreign currency translation in the quarter was a negative 3%. Our adjusted operating profit margin in the first quarter was 9.8%, an improvement of 40 basis points from the prior year. The improvement came from the benefits of the simplification program and the accretion from the PTS acquisition. Our adjusted earnings per share in the first quarter were $1.21 a share, a 16% increase from the prior year. Let me walk through the adjustments from our first quarter 2015 GAAP EPS of $0.81 per share to the adjusted EPS of $1.21 per share. The first adjustment is for the purchase accounting and closing costs related to the PTS acquisition, totaling $22.7 million or $0.36 per share. The components are detailed below. The first item is inventory purchase accounting adjustments charged to cost of goods sold of $13.5 million or $0.22 per share. The second component are the PTS transaction and closing costs in SG&A of $9.2 million or $0.14 per share. No additional PTS transaction costs are expected in the future. The next adjustment to our EPS was restructuring charges totaling $1.2 million or $0.02 per share related to our simplification initiative. Restructuring charges in the quarter broke down as 20% in cost of goods sold and 80% in SG&A expenses. The last adjustment was a non-cash devaluation expense on our Venezuelan operation. During the first quarter of 2015, the Venezuelan government replaced the SICAD II option process with the new foreign exchange rate mechanism known as SIMADI. This SIMADI market rate was VEF 193 to the U.S. dollar as of April 4, 2015. As a result, we recorded a $1.5 million or $0.02 per share devaluation expense in the quarter recognized in SG&A expenses. These adjustments totaled $25.3 million or $0.40 per share in the first quarter. The adjusted EPS for the first quarter 2015 was $1.21 per share. Before I leave this slide, looking forward to the second quarter, we will expense the final $6.5 million or $0.11 per share of inventory purchase accounting adjustments. The total inventory adjustments will be $20 million, $5 million higher than we earlier estimated due to the timing of the PTS closing. Now, I will summarize some key financial metrics for the first quarter 2015. Our capital expenditures in the quarter were $21 million. We still forecast capital expenditures totaling $105 million for the full year 2015. Our effective tax rate in the first quarter was 26% and we expect to maintain this 26% ETR in 2015. This ETR includes the PTS acquisition and the $5 million of tax synergies. In the lower left quadrant, we provide data on our first quarter balance sheet. Our total debt was $1,947 million and our net debt was $1,717 million. Our total debt increased with the PTS acquisition financing. While this is a large increase in debt, Regal has a long history of taking on additional debt to fund transformational acquisitions and then using our free cash flow to reduce that debt. In the lower right quadrant, we present information on our free cash flow in the first quarter. We posted a negative $4 million of free cash flow. We typically have a low free cash flow in the first quarter, driven by the seasonal growth in sales and the resultant increase in working capital. Additionally, the acquisition of PTS during the quarter required the investment in the seasonal increase in working capital without the contribution of a full quarter of normalized profits. Our continuing goal is to generate free cash flow in excess of 100% of net income and we expect to perform well against this goal in the future. Our updated full-year 2015 guidance is for GAAP EPS of $4.80 to $5.10 per share. On an adjusted EPS basis, after adding back the $0.47 per share of inventory purchase accounting adjustments and transaction costs for PTS, the estimated $0.16 per share of restructuring charges and the $0.02 per share for the Venezuelan devaluation, our full-year 2015 guidance for adjusted EPS is $5.45 to $5.75 per share. Let me speak to some of the key assumptions in our 2015 guidance. Number one, we are expecting our effective tax rate to be 26% in 2015. This includes the tax synergies from the PTS acquisition. Number two, as Mark mentioned, we expect continued headwinds from weaker demand from upstream oil and gas, the air pocket in North American Climate Solutions, caused by the SEER 13 pre-build, and from foreign currency. Number three, our guidance does not assume a refinancing of a portion of the PTS bank financing, although we continue to evaluate this opportunity. Future credit market conditions will drive that decision and the impact on our interest expense. And finally, the finalization of the purchase accounting on the PTS acquisition may have a minor impact on future depreciation and amortization expenses. In summary, our guidance for 2015 adjusted EPS is an increase of approximately 26% to 33% over our 2014 results. Now, I'll turn the call over to Jon Schlemmer.

[Jonathan J. Schlemmer:]

Thanks, Chuck, and good morning, everyone. I'd like to give you some updates on the end markets, customer demand, new products and our simplification efforts. I'll cover two of the three reporting segments, Commercial & Industrial Systems and Climate Solutions, and then Mark will comment on the Power Transmission Solutions segment. Let's start with Commercial & Industrial Systems. Overall, sales were $456 million, a 1% increase from prior year. Foreign currency negatively impacted sales by approximately 5%, offsetting the acquisition growth of 5%. We experienced strength in our Global Power Generation business, as well as our North American motors business. However, that growth was partially offset by weakness in oil and gas and China. In North America, our motor sales grew for the second quarter in a row with strength in distribution, commercial HVAC and a number of general industrial end markets. This was similar to what we experienced in the fourth quarter of 2014. However, we did see the order rate soften as we progressed through the first quarter. Adjusted operating margin was 8% of sales, declining 50 basis points from the prior year. The impact of the lower oil and gas volumes and foreign currency combined to create a 100-basis-point headwind on our operating margin in this segment. However, our self-help activities allowed us to claw back 50 basis points. Given the increased pressure from currency and oil and gas, we're accelerating a number of actions to reduce cost and further simplify the business. The largest of these moves is the restructuring of our Kentucky-based motor parts making operations where we're exiting two facilities in Kentucky and shifting those operations closer to our assembly facilities in Mexico. We're at the halfway point on this transition and we're targeting to be substantially complete by the end of the third quarter. During the first quarter, we also made announcements to consolidate and close three smaller manufacturing facilities in France, Australia and Japan. We exited the facility in France in the first quarter, and we will exit the other two facilities before the end of the second quarter. I'd like to wrap up the Commercial & Industrial Systems segment with the commentary on our ongoing new product focus on energy efficiency. We continue to believe that energy efficiency is a long-term secular trend that plays in our favor, and we're investing in innovative new products that offer our customers an energy efficiency payback. In early 2014, we highlighted the launch of the 4-horsepower SyMAX ECM motor and control. This product was developed to bring our proven residential HVAC ECM technology to larger motors for higher horsepower air conditioning, refrigeration and ventilation applications. We're now in production and the interest from customers is growing. And now that we've proven the technology is scalable up to 4-horsepower, we're moving on up to even larger – to an even larger 10-horsepower solution. The new higher horsepower SyMAX design utilizes our latest Permanent Magnet Motor and Control technology. The technology not only delivers significant energy efficiency gains, but also offers our customers a much more compact and lighter-weight solution. Sales in our Climate Solutions segment decreased approximately 2% in the quarter. Most of the decrease was the result of foreign currency translation, with organic sales relatively flat in the quarter. North America residential HVAC sales declined slightly as compared to prior year. The decline was driven by SEER 13 pre-build, the impact of lower commodity costs on our two-way material price formulas and lower demand on residential heating products, all in line with our expectations. The 2014 pre-build is expected to reduce first half 2015 sales by $15 million and make the second half comparison $15 million unfavorable. Residential heating product sales decreased in the quarter compared to a very strong first quarter prior year. Offsetting the decline in North America was increased demand in the Middle East and India markets. Our team has done a nice job developing a number of new products to help our customers meet new standards in the Middle East and we're seeing strong demand for these products. Adjusted operating margin in the Climate Solutions segment was 11.6% of sales, an increase of 90 basis points from prior year. Much of the benefit can be attributed to our simplification initiatives. During the quarter, we completed the production move from our Springfield, Missouri operation to our facilities in Reynosa, Mexico and McAllen, Texas. The operations in Reynosa and McAllen are running well. In fact, we're not only seeing productivity improvements. We're also experiencing excellent quality and on-time delivery results. Just in the last few months, several of our customers have given us positive feedback on our performance. Last year, we completed three of our five targeted design platform simplification programs. The fourth program is our small 3.3-inch motor platform impacting our Climate Solutions business. We remain on track to complete this program by midyear. The fifth and final design platform consolidation will be completed by the end of 2016 as expected. I'll now turn it back over to Mark to cover the Power Transmission Solutions segment and to wrap up. Thank you.

[Mark Joseph Gliebe:]

Thanks, John. Sales in our Power Transmission Solutions segment were $175 million, up 179%. In the segment, we have two topics to discuss that impacted the quarter. The first was the acquisition of the PTS business. As you know, we closed on January 30 and therefore, we only had two months of ownership included in our segment reporting. Sales for those two months were $170 million, which was about as expected. The acquired business was negatively impacted by both the oil and gas decline and the shift in currency. Given all the activity around the transition and the integration, we are very pleased with our progress. While we expect these two headwinds to continue through 2015, we also expect that this new addition to Regal will continue to perform as they did in the first quarter. The second topic is the strong performance of the legacy Power Transmission business which grew nearly 10% in the quarter. We had mid-single-digit revenue growth in the majority of our legacy businesses and our performance benefited from the oil and gas backlog which we don't expect to continue going forward. Overall, adjusted operating margin in the Power Transmission segment was 11.4%, up 160 basis points from prior year. The volume leverage in our legacy business, our simplification efforts and the margin accretion from the acquisition all benefited operating margins in the quarter. We expect that synergies from the acquisition begin to help in the back half of 2015, offsetting a portion of the loss of the volume leverage that we enjoyed in the first quarter. Overall, the Power Transmission segment is off to a great start for the year. Now, I'll move to summarize. Sales were up 14% for the quarter, and we experienced organic growth in two of our three reporting segments. The organic growth came in spite of currency headwinds, the oil and gas decline, weakness in China and expected impact of the 13 SEER pre-build. Our operations performed in line with our expectations, and operating margins improved 40 basis points. The PTS integration and the synergies expected from integration is on track and customer feedback is quite positive. On capital allocation, our overall strategy has not changed and our near-term bias will be to pay down debt. Also, we did recently raise our quarterly dividend to $0.23 per share. Finally, our adjusted – our full-year adjusted guidance reflects a 26% to 33% increase in adjusted EPS on a year-over-year basis. We will now take your questions.

[Operator:]

We will now begin the question-and-answer session. At this time, we will pause momentarily to assemble our roster. The first question comes from Samuel Eisner of Goldman Sachs. Please go ahead.

[Samuel H. Eisner:]

Yeah. Good morning, everyone.

[Mark Joseph Gliebe:]

Good morning, Samuel.

[Samuel H. Eisner:]

On the comments that you made in the press release and then also just now regarding the slowdown in March and the continuation in April, can you talk a bit more about the different segments of your business that have seen that dynamic? And was April a further kind of deceleration from the March rate or did it kind of flatten out from March to April? Thanks.

[Mark Joseph Gliebe:]

Yeah, no problem. I would say April was similar to March – they didn't get any worse. And primarily where we saw the slowdown was in the Commercial & Industrial segment, and I would say that was – further deterioration in oil and gas as we burned off the backlog and then also an impact in China and also in our legacy PTS business. So, we had very strong performance kind of across the board, and that probably took a step down in the month of March.

[Samuel H. Eisner:]

Got it. And then when you look at the expectations for PTS and you commented that the synergies in the back half of the year are going to offset some of the, I guess, volume weakness that you're seeing, do you expect that that business – have you changed your expectations for accretion for either the 12 months or the impact on 2015? Just want to understand what's changed since you've now acquired PTS.

[Mark Joseph Gliebe:]

Yeah. No, we haven't changed our accretion assumptions and we have not changed our synergy targets. We commented that on an adjusted basis, we'd be near – in and around the $0.70 per share basis. We've commented on that in the first quarter and we still feel that way today. And then on synergies, it's $30 million over four years, $7 million in the first year. I would say my comment was that we are on track for the first year to either meet or exceed the first year targets. But in total, we're sticking with our $30 million target over the four years.

[Samuel H. Eisner:]

And then just lastly if I could sneak one in regarding the margins in Climate, up almost 90 basis points to 100 basis points year-on-year. Do you have any benefit from the timing of materials within the Climate segment, or is that really just all simplification that's driving the margin improvement on basically flat organic performance? Thanks.

[Mark Joseph Gliebe:]

Yeah. No problem. It's a fair question, there's a lot of moving parts there. First of all, no question, simplification is a contributor. There's no question about it. And you're right to say that we have two other variables going on there. We have the effect of material price formulas, which – they're two-way material price formulas. So, as commodities go down, your price goes down. And as commodities go up, your price goes up. So, that has an effect. And then also, we hedge our copper and aluminum by out five quarters. So that has an effect. There may have been some benefit in the quarter. I wouldn't call it substantial, but there may have some benefit in the quarter as a result of those two variables.

[Samuel H. Eisner:]

Great. I'll hop back in queue. Thanks.

[Mark Joseph Gliebe:]

Thank you, Samuel.

[Operator:]

The next question comes from Josh Pokrzywinski of Buckingham Research. Please go ahead.

[Joshua Pokrzywinski:]

Hi. Good morning, guys.

[Mark Joseph Gliebe:]

Good morning, Josh.

[Charles A. Hinrichs:]

Hi, Josh.

[Joshua Pokrzywinski:]

So, just a question on the outlook in some of the revisions you guys have made. If you had to think about how you came in this quarter versus your own expectation, I know you don't give quarterly guidance anymore, it sounds like a few things trended better than you would have expected. Should we think of that $0.05 reduction at the midpoint as maybe a $0.10 or $0.15 reduction to 2Q through 4Q? I guess – any way you guys can dimension that would be helpful.

[Mark Joseph Gliebe:]

Well, the $0.05 of reduction is largely an impact from currency. If you think about currency impact on the year, the currency got worse from the time that we provided our guidance. And that would be the biggest contributor which would kind of impact evenly throughout the year.

[Joshua Pokrzywinski:]

Okay. So, the core outlook for 2Q through 4Q then isn't changing? I was just trying to tie back to the comments that March and April were a little more sluggish and trying to determine what of that is in guidance versus not in guidance.

[Mark Joseph Gliebe:]

Well, yeah. I mean, no question. From the point at which we started the quarter, things got slower. No question about that. So – but I would say the biggest contributor to the $0.05 decline was certainly currency. There's a little bit in there from volume – lower volume expectations for the year as well.

[Joshua Pokrzywinski:]

Okay. And then just on the free cash flow from here, I understand there's probably some moving pieces with the close and how D&A steps up from here and certainly the working capital impact of the timing. But can you help us, Chuck, with D&A run rate kind of quarterly from here? And then is there anything else on the working capital side we need to kind of watch for to hit that 100% conversion? And just, I guess, you guys are starting out a little bit more in the hole than usual, given the timing of the deal. And I'm just trying to get back to that 100% and having a hard time.

[Charles A. Hinrichs:]

Sure, Josh. Thanks for your question. Yeah, the free cash flow in the quarter was negative because of the increase in sales and then the required investment in working capital. On the PTS side, we had also the seasonal increase, but because of some of the accounting adjustments and transaction costs, op profit and contributing cash flow for PTS was impacted. So, it's normal for us to see that kind of an increase in working capital. And I have no concern that we're not going to be back on our normal pattern of generating free cash flow throughout the year and continue to make reductions in our debt as planned.

[Joshua Pokrzywinski:]

And what was the – what's the run rate for D&A kind of after this quarter?

[Charles A. Hinrichs:]

I don't have that number in front of me, Josh. We'll have that in the 10-Q that's filed later this week for the full year. There was a modest increase in D&A as we continue to finalize our purchase accounting.

[Joshua Pokrzywinski:]

Okay. That's helpful. I'll get back in queue.

[Charles A. Hinrichs:]

Okay.

[Operator:]

The next question comes from Julian Mitchell of Credit Suisse. Please go ahead. Julian C. H. Mitchell - Credit Suisse Securities (USA) LLC (Broker) Hi. Thank you and congratulations, John, on that move.

[John M. Perino:]

Thank you. Julian C. H. Mitchell - Credit Suisse Securities (USA) LLC (Broker) I guess my first question would be on the C&I margins. Does the midpoint of your earnings guidance embed that those C&I margins are up for the year? They were down slightly in Q1. Just wondered how we should think about that margin maybe turning back up and how quickly that could happen.

[Mark Joseph Gliebe:]

So, I would say for the year, Julian, the big contributor was the lower oil and gas volume. That was the big contributor to the decline in the quarter. Secondarily, we had a currency change – currency headwind in the quarter. We don't see either of those two things changing for the quarter, so I would guess there will be pressure on margins in the C&I segment through most of the year. Julian C. H. Mitchell - Credit Suisse Securities (USA) LLC (Broker) Thanks. And then just on the restructuring charges, looked like the charges was taken down from sort of $0.21 to $0.16, maybe just talk a little bit about the background there.

[Mark Joseph Gliebe:]

Yeah. So, we actually had a good guy in the quarter relative to the closure of our Springfield facility. We actually had to give back in the quarter that it was $1 million less than we had originally anticipated, which is good news. We had to spend less than we thought. So, that was the principal change in the quarter. Julian C. H. Mitchell - Credit Suisse Securities (USA) LLC (Broker) Thanks. And then lastly, should we expect organic sales to probably be down year-on-year in Q2?

[Mark Joseph Gliebe:]

Well we don't typically provide revenue guidance. However, the color around it is, as we go into the second quarter, on the Climate side, we still have headwinds around the SEER 13 pre-build, that'll be the big headwind there. On the C&I side, we'll have headwinds from oil and gas. Currency is a headwind. So, we had 1% in the first quarter. And with that color, I think you should be able to think – that's the color we can provide on the second quarter. Julian C. H. Mitchell - Credit Suisse Securities (USA) LLC (Broker) Thanks. That's very helpful.

[Mark Joseph Gliebe:]

Thank you.

[Operator:]

The next question comes from Mark Douglass of Longbow Research. Please go ahead.

[Mark Douglass:]

Good morning, gentlemen, and congratulations, John.

[John M. Perino:]

Thank you, Mark.

[Mark Joseph Gliebe:]

Morning, Mark.

[Mark Douglass:]

Regarding the facility closures in C&I, I might assume that that was already embedded in prior guidance, it just wasn't announced yet until you were ready to make the moves, or is that incremental?

[Jonathan J. Schlemmer:]

Mark, this is Jon Schlemmer. That's correct. We had made – we had planned those in our forecasting, but we had not yet announced those. That's why we weren't able to talk about it on the last call with any specifics.

[Mark Douglass:]

Okay. Thank you. And then the $15 million impact of the pre-build in Climate, you said $15 million in the first half?

[Jonathan J. Schlemmer:]

Correct. $15 million of headwinds in the first half, and then the $15 million comparison, difficult comparison in the second half.

[Mark Joseph Gliebe:]

And I'll just add, Mark. As we came out of Q3 and Q4 last year, that was our best estimate of what was pre-build.

[Mark Douglass:]

Right.

[Mark Joseph Gliebe:]

And so, therefore, we believe that that has to come up. Most of our customers are telling us that they believe the pre-build will be – pre-build sell-off will be complete by the end of the first half.

[Mark Douglass:]

Okay. Is it fair to assume that most of that $15 million was in the first quarter?

[Mark Joseph Gliebe:]

Yeah. It's tough for us to know for our own planning purposes. We're thinking about evenly split, but it's difficult for us to know.

[Mark Douglass:]

Okay. That's helpful. And then finally, Chuck, on the free cash flow, I understand why the first quarter was a little light. You're still expecting 100% of conversion. But I know a little while ago, you talked about potentially you've seen $300 million. What's changed between, I think it was December when you were talking about $300 million of free cash flow and now where I'm thinking probably closer to $250 million, $260 million?

[Charles A. Hinrichs:]

Well, Mark, no real change. Thank you for your question, but we have always ranged that free cash flow and potential debt reduction at $250 million to $300 million. And so, to the extent our guidance effectively for 2015 has not changed, we are still committed to generating that free cash flow for debt repayment in 2015. It's just the first quarter where we typically see a large increase in working capital to support the sales growth.

[Mark Douglass:]

Okay. Then my last question probably. So, with that, the debt repayment, there's enough of debt on the books, you can repay $200 million plus of debt in the year, it's not all fixed.

[Charles A. Hinrichs:]

No, it's a term loan with prepayment abilities that we can access.

[Mark Douglass:]

Great. Thank you.

[Mark Joseph Gliebe:]

Thank you.

[Charles A. Hinrichs:]

Thank you.

[Operator:]

The next question comes from Jeff Hammond of KeyBanc Capital Markets. Please go ahead.

[Jeffrey D. Hammond:]

Hey. Good morning, guys.

[Mark Joseph Gliebe:]

Good morning, Jeff.

[John M. Perino:]

Hi, Jeff.

[Jeffrey D. Hammond:]

So, just first, can you just talk about what the core growth rate was for the Emerson PTS business in the quarter and how that kind of trended similarly into kind of March, April in terms of kind of order trends within the acquired business?

[Mark Joseph Gliebe:]

Yeah. If we did look at the business on a pro forma basis, obviously, we didn't own – we only owned it for two months. But if we look back on a pro forma basis how the business performed, the two key headwinds were FX and oil and gas. And in that particular business, about 10% of its sales are in the oil and gas segment, and about half of that is upstream. So, there was certainly some headwind there. And then we had FX headwinds. So, it pushed us slightly down in the quarter, and we expect that to continue through the year.

[Jeffrey D. Hammond:]

But if you strip out that noise, was the base business – if you strip out the FX, was the base business growing similar to the legacy PTS that was up 10%?

[Mark Joseph Gliebe:]

No, it was not. We did not have that kind of performance. Remember, while we had some real strong growth in the oil and gas segment of the legacy PT business, driven by backlog that we shipped down during the quarter, that drove up solidly. Now, we did have lesser growth in the rest of our businesses. And I would say that with the PTS-acquired business, we had similar performance in a few of those businesses as well.

[Jeffrey D. Hammond:]

Okay. And then just back to Josh's question on the guide, I mean, is it fair to say your 1Q was ahead of expectations and maybe some of the offset is some of the slowing in March-April? Or your guidance originally contemplated that kind of those robust growth rates would have slowed and you would have seen some of this slowing in March and April?

[Mark Joseph Gliebe:]

Well, obviously, as you know, we didn't provide guidance in the first quarter. But with our own internal expectations, we performed kind of on par with what we thought was going to happen. Obviously, currency was a little bit more of a headwind as we got through the quarter than we had thought. If you recall back to our first quarter earnings call, we made a comment that orders were robust near term, but we weren't sure that that was going to continue.

[Jeffrey D. Hammond:]

Okay. And then just finally, what should we think about for interest expense for the year just given, interest rate, debt pay down kind of year-to-date?

[Charles A. Hinrichs:]

Yeah, Jeff. We modeled that at kind of current interest rates of around 2% to 2.25% on our bank term loan and then the $250 million to $300 million debt reduction obviously more weighted towards the second half of the year. So I think that...

[Jeffrey D. Hammond:]

Okay. So, what's like an all-in interest expense number for the year?

[Charles A. Hinrichs:]

Let me see if I can dig that up for you.

[Jeffrey D. Hammond:]

Okay. Thanks.

[Charles A. Hinrichs:]

Shall we go to the next question and then I'll give some feedback on the full year interest expense number?

[Operator:]

The next question comes from Christopher Glynn from Oppenheimer. Please go ahead.

[Christopher D. Glynn:]

Thanks. Good morning and congratulations, Mr. Perino.

[John M. Perino:]

Thank you, Chris.

[Mark Joseph Gliebe:]

Morning, Chris.

[Christopher D. Glynn:]

Good morning. So just the comments on the Middle East and India's strength in Climate Solutions. Just wondering if you could build on those comments a little bit. What's strategic, what's market and how important are those geographies to the segment?

[Jonathan J. Schlemmer:]

Chris, this is Jon Schlemmer. I'll comment on that. While they're not nearly as large as the North American market for us, they are important geographies for us. The residential HVAC markets are – we have a strong base with our production in India to support the India domestic market and then also to support the HVAC market in the Middle East. They – both markets performed very well. There is very strong demand in those markets and our teams have done a nice job, as I mentioned, developing some new products that are helping our customers meet some new standards, and that's really helped us this year. So, we're seeing very good demand across both markets and that – we saw that in the latter half of 2014 and it's continued on to 2015.

[Christopher D. Glynn:]

Okay. So, it sounds like some favorable share dynamic there. And then just with PTS, a decent-sized business coming from a long-term home in Emerson. Anything interesting culturally coming together that – opportunity, challenge, et cetera?

[Mark Joseph Gliebe:]

Well, the good news is, first, we're three months or four months into it here and the good news is there's been no surprise. So, that makes us all feel very good. Culturally, we felt good from the get-go. For the first time we met the leadership team, we felt good about the cultural alignment, and I would say that that's just been continually reinforced. So, we love the leadership team, as you know. The acquired business, the leadership team from the acquired business, which was running a roughly $600 million business, is now leading the entire PTS segment which is closer to a $750 million or $800 million for the company, and that's going quite well.

[Christopher D. Glynn:]

Sounds good. Thank you.

[Mark Joseph Gliebe:]

And, Chris, our team looks forward to participating in the conference. So they'll be leaving here later today to head down.

[Christopher D. Glynn:]

I'll try to beat them there.

[Mark Joseph Gliebe:]

Okay. Thanks.

[Charles A. Hinrichs:]

And if I could just jump in, Jeff Hammond, to answer your question about the interest expense, we would expect the full-year interest expense number to be around $59 million on a gross basis and about $56 million on a net interest expense basis.

[Operator:]

The next question comes from Walter Liptak of Global Hunter. Please go ahead.

[Walter S. Liptak:]

Hi. Thanks. Good morning.

[Mark Joseph Gliebe:]

Morning, Walter.

[Walter S. Liptak:]

Wanted to ask about the slowing in the PTS business and your comments on accretion for the year and just some clarity on it. Are we saying that the Emerson business is slowing a little bit more than your original projections and you're expecting to make it up with better cost reduction or better synergies this year?

[Mark Joseph Gliebe:]

What's changed for us since the time that we put together the pro forma has been the decline in oil and gas and the decline in currency. So, yeah, we run it like any other business, which is when things impact your – impact the business, you're going to go find ways to offset it. And whether that's costs or synergies – and on the synergy side, we have a lot of place to go mine it, in operations, procurement, cross-selling, tax, et cetera. So yes, we're going to go after everything we can to offset anything that we didn't expect at the time that we bought it.

[Jonathan J. Schlemmer:]

And Walt, this is Jon. As I mentioned, on Commercial & Industrial Systems, we are accelerating those cost reduction actions as well, especially around our simplification initiatives. That is exactly what we're doing given some of the additional pressures on the top line.

[Walter S. Liptak:]

Okay. Okay. Sounds good. On that slide that you – number 6 where you talked about the green status, what does that mean exactly? And the two plants that aren't there with green status, are those larger plants, I guess what does that mean exactly?

[Mark Joseph Gliebe:]

No problem. So, this was – of all the deals the company has ever done, this was a little bit more complicated just because of the number of locations around the world that we had to unplug from Emerson and plug into Regal. When we used the term 26 sites, it's not necessarily a manufacturing location. It's often a – as an example, we'll have an office in Manila where we house roughly 120 employees that were part of a much larger substantial facility that Emerson runs with thousands of people. And we need to get out of their facility, get into our own facility, get our own lease, get under our own payroll systems where we had no operations. So, what red, yellow, green means is that the employees on the Regal payroll system, have we changed the legal entity and do we feel like there's no retention risk or issues facing us? And so, I'm very pleased with our progress, 24 of the 26 sites are green status. The other two I put in the category of yellow status, which means we're just not done yet. We got to get people into our own facilities. And so, we're working on that right now and I don't expect any big problems. We'll be done by the end of the third quarter.

[Walter S. Liptak:]

Okay. I get that. And then just one last one on – just some of the trends, you comment on oil and gas slowing. But what about residential HVAC for 14 SEER and above, if there's any trends that you can discern there? (45

[Jonathan J. Schlemmer:]

Walt, this is Jon Schlemmer. On the – I'll start with the residential. So on the residential market, other than the headwinds from the SEER 13 pre-build, we feel pretty good about just the overall market strength in North America right now. Most customers are talking about the market growing at a kind of a mid-single-digit rate. So, that seems like a pretty good outlook for the business. And so, the underlying performance is good in the business. Also, we had – it wasn't significant, but we had a good demand for energy efficient products in North America in the first quarter as well. So, that's positive to see in the business. That's similar to what we saw in the fourth quarter last year. On commercial HVAC, we haven't seen a slowing. So, that's what I would say on the commercial side.

[Walter S. Liptak:]

Okay. All right. Thank you.

[Mark Joseph Gliebe:]

Thank you, Walter.

[Operator:]

The next question comes from Scott Graham of Jefferies. Please go ahead.

[R. Scott Graham:]

Hey. Good morning.

[Mark Joseph Gliebe:]

Morning, Scott.

[R. Scott Graham:]

Where were you guys on price costs, were you positive or negative this quarter?

[Mark Joseph Gliebe:]

I would say it's probably a push for the quarter, not significant impact on the quarter. We had some benefit from deflationary, either materials or projects where we picked up deflation. So – but overall, it was probably not an impact.

[R. Scott Graham:]

And the indexing affects all of your motors businesses, not just HVAC, right?

[Mark Joseph Gliebe:]

Well, about 30% of the company – when you say indexing, I'm assuming you're referring to material price formula. I think that's what you're referring to. So, on material price formulas, we have about 30% of the company has agreements with customers that are two-way and are driven by material price formulas. And that would cost the Climate business and the Commercial & Industrial business, most of it in Climate.

[R. Scott Graham:]

Okay. So, I guess that's a smaller number than I would have thought. And so, why would you have been flat? Why wouldn't that have been a positive for you?

[Mark Joseph Gliebe:]

You're referring to currency – I mean, I'm sorry, you're referring to commodities?

[R. Scott Graham:]

Well, price cost, right, because steel prices were pretty noticeably down. And if you held price for 70% of your business...

[Mark Joseph Gliebe:]

Yeah. So, first of all, in the case of 30% with material price formulas, the big driver was copper. The big driver – and remember, you get timing issues here where you're looking in the rearview mirror one quarter in some cases, so – not in all cases, but in some cases, you're looking back a quarter to determine what happens this quarter. So, there's that moving part. Now, the other point I'll remind you is that we do hedge copper out five quarters. And so, that – all we're trying to do is get certainty on the commodities on copper and aluminum. And so, some of those hedges were underwater during the quarter.

[R. Scott Graham:]

Okay. So, away from the 30%, you're saying then that you did hold price?

[Mark Joseph Gliebe:]

Yes.

[R. Scott Graham:]

Got you. Thank you. The other question is about the refi of the Emerson deal which you're in a great position where you don't need to, which is great. But at some point, with more acquisitions or otherwise, you will, and particularly in this rate environment. Mark, what's the trigger to have to refi? Is there a certain level of EBITDA, net debt to EBITDA you just won't go over? Is it a decent-sized acquisition to get you there? What's the trigger there?

[Charles A. Hinrichs:]

Hey, Scott, it's Chuck. Thank you for your question. I wouldn't say that there is a triggering event. It's an issue that we continue to study and talk to our board about. So, the – our thoughts, our current thoughts are that number one, it would only be for a partial amount of the bank debt term loan. So, it wouldn't have that material of an impact on the interest expense, but when it does, we'll have an announcement to that effect. And it takes some time to prepare ourselves for that decision and then the execution of that. But our free cash flow will be strong and we expect to be able to make sizeable debt reductions on the term loan and it's a five-year maturity. So, as you said in your introductory comment, it's not something we have to do. It would just be a question of reordering a little – our bank term loan, putting it out into a longer-term maturity and freeing up our availability in the bank debt market.

[R. Scott Graham:]

Got you. Last question. As you see, and this is partially adding to an earlier question. Mark, the slowdown that you see in the order book, what does that mean for mix, the next couple quarters?

[Mark Joseph Gliebe:]

Well, I'll take it by – I'm going to take it by segment, Scott. So, first I'll talk on Climate. Scott, Jon mentioned the fact that we had higher volume in India and the Middle East. That business would be slightly lower mix for us. However, we had a positive offset, Jon just mentioned in the North American piece of the market, where we had slightly better mix more towards energy-efficient products. So, that was helpful. And both the PTS and C&I segments, I don't think the downturn really affects our mix to the point where it would materially impact our margins.

[Jonathan J. Schlemmer:]

I would agree, Mark. I'm just thinking about that. It's a good question. I think where, we've seen from an order standpoint, where we've seen the downturn, I don't think it's a significant impact, good or bad with mix.

[Mark Joseph Gliebe:]

Good question.

[R. Scott Graham:]

Understood. Thank you. Nice quarter.

[Mark Joseph Gliebe:]

Thanks, Scott.

[Operator:]

The next question comes from Liam Burke of Wunderlich. Please go ahead.

[Liam D. Burke:]

Thank you. Mark, talking about the synergies with Emerson, the revenue synergies, how are they progressing? And how do you see that rolling versus how you thought about it prior to the acquisition?

[Mark Joseph Gliebe:]

Morning, Liam. Yes, we did have selling synergies in our estimate. It was roughly 20% to 30% of the total, if I recall correctly. And the good news is we've already seen a little bit already. We had a customer recently give us a big order that he told us had it not been for your capability with PTS, we probably wouldn't have got that order. So we're already seeing a little bit of that. And we expect more going into the future. I could promise you we are targeting every opportunity across both businesses. And it goes both ways. We'll see benefits on the PT side where we'll be selling our gearing products to a larger customer base and also on the electric motor side where we'll be trying to use the strong footprint of the acquired business to sell more of our electric motor. So, we absolutely see opportunities there, and we expect more in the back half of this year and into next year.

[Liam D. Burke:]

Great. And you kind of had a lot going on in the first quarter, how does the new product pipeline look?

[Mark Joseph Gliebe:]

Well, nothing's changed from our – as you know, we're pretty passionate about that. We believe innovation is key in our businesses here. So, Jon mentioned one of the very exciting SyMAX product line. We're expanding that product line into higher horsepower motor, so we're quite excited about that opportunity. But we've been on a pace to do roughly 50 to 70 new products a year, and that won't change. We still believe innovation is key for this business moving forward.

[Liam D. Burke:]

Great. Thank you, Mark.

[Mark Joseph Gliebe:]

Thank you, Liam.

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference back over to Mark Gliebe, Chairman and Chief Executive Officer for any closing remarks.

[Mark Joseph Gliebe:]

Thank you for your questions and for your interest in Regal. Have a great day.

[Operator:]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.